Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain on global business so you
Speaker 1: can invest better across the Asia Pacific rim. I'm John
Speaker 1: Lee in Hong Kong. Shareholder activism is gaining traction in Japan.
Speaker 1: The number of new activist campaigns surged seventy percent year
Speaker 1: on year to over one hundred in the first half
Speaker 1: of this year, marking the biggest increase out of any
Speaker 1: major market in the world. Meanwhile, a number of new,
Speaker 1: homegrown activist funds are becoming more prominent in Japan's corporate circles.
Speaker 1: What's driving the growth in shareholder activism in Japan? Is
Speaker 1: Japanese corporate culture finally changing? And how do Japan's new
Speaker 1: activist funds differ from their famous US counterparts? By Elliott
Speaker 1: Advisors and Bill Ackman. Here to discuss Japan's push for
Speaker 1: corporate governance and shareholder activism is Shuhei for Kawa, Managing
Speaker 1: director and portfolio manager at Misaki Capitol, and James Hahn,
Speaker 1: managing partner at Prodigies Group focused on local activism. Welcome
Speaker 1: Shoehy and James Hi.
Speaker 2: John, I'm great to be here.
Speaker 3: Thanks for having.
Speaker 1: US shoe Hey, I wanted to ask, are we in
Speaker 1: a golden period of shareholder activism in Japan?
Speaker 3: Yeah?
Speaker 4: I think this is one of the start points of
Speaker 4: the golden period of shareholder activists in Japan. The US
Speaker 4: experienced the same things in the late nineteen eighties, and
Speaker 4: I believe this is just a start compared to the
Speaker 4: US now, Jeffan's average portion of the low pbo vo
Speaker 4: one company is about fifty percent. Same things happen in
Speaker 4: the US in the ninety eighties. There are some structure
Speaker 4: change in the US. It takes twenty years or thirty
Speaker 4: years to change the corporate god in one country, and
Speaker 4: they are compared to the US. I think Japan is
Speaker 4: just a start point of a reform of a corporate governance,
Speaker 4: and the develotop of the change of corporate governance in
Speaker 4: the decent years is a huge I think this is
Speaker 4: still slow, but this is a good timing to entry
Speaker 4: to this market.
Speaker 1: And James, you've been working in the Japan activist scene
Speaker 1: for quite a number of years, over a decade. What's
Speaker 1: been the major driving force of the rise of shareholder
Speaker 1: activism in Japan? Has it been the corporate governance code
Speaker 1: or did it start before then?
Speaker 5: I think the simple answer is it's definitely been government
Speaker 5: policy led the introduction of the Corporate Governance Code.
Speaker 3: The stewardship codes. These are all.
Speaker 5: Sticks and carrots introduced by the government in the FSA.
Speaker 5: I mean, there are other environmental regions behind us, but
Speaker 5: I mean it's definitely it's been a government led process.
Speaker 3: So, and it's been around for quite a while, okay.
Speaker 1: And when the public thinks of shareholder activism, they often
Speaker 1: think of the US activists, the famous ones like kark On,
Speaker 1: Bill Ackman, Elliott Advisors, which is actually taking on one
Speaker 1: of the Japan's biggest corporate soft bank. They often attack
Speaker 1: corporate boards, sometimes they attack governments. How are japan local
Speaker 1: activist funds different from say, these famous US activists.
Speaker 4: I think whether the approach is Hohl foundational or constructive
Speaker 4: is not nedated to the nationality. It's the matter with
Speaker 4: the fund staff. However, as a local activist fund, we
Speaker 4: understand how the unique culture of a Japanese company influences
Speaker 4: their digital make it so the strength of local activist
Speaker 4: fund lies and diabeity to emphasize what the management is
Speaker 4: struggling with and why they may not be making a
Speaker 4: light Jim.
Speaker 6: And James, did you want to on that as well.
Speaker 3: Yeah, two comments.
Speaker 5: The first is that the one way that the locals
Speaker 5: are different is they tend to be more constructive.
Speaker 3: You know, carrots rather than sticks. And if you look.
Speaker 5: At the now what twelve years or so history of
Speaker 5: this sort of development, a lot of people don't realize
Speaker 5: is that a lot of the engagement carrot driven approach,
Speaker 5: it's actually had a better track record, at least in
Speaker 5: the first half.
Speaker 3: And I think that's something that's kind of people overlook.
Speaker 5: I mean, I think the second thing is that I
Speaker 5: think a lot of people don't realize this, but now
Speaker 5: Japan is the second most active in terms of industor
Speaker 5: proposals in the world.
Speaker 3: I mean, careas number three. Everyone knows us is number one,
Speaker 3: but I mean there's quite a lot of activity here.
Speaker 1: And you mentioned the carrot approach for local activist funds.
Speaker 1: Do you feel that, you know, Japanese corporate boards are
Speaker 1: more receptive to local activists such as yourself versus the
Speaker 1: Globe blacktivists.
Speaker 4: I believed the company I'm more willing to accept the
Speaker 4: activists who take a construct approach, and that in case
Speaker 4: of Misaki, they're even inbound a query from the company,
Speaker 4: meaning that the company came to Misaki and ask investment
Speaker 4: a device.
Speaker 1: Okay, so companies are now approaching you to improve the
Speaker 1: corporate strategy and the shareholder return strategy.
Speaker 7: Yeah, we are.
Speaker 4: Often asked to make our presentation at the board medium
Speaker 4: in Japan, the CEO often has an opportunity to meet
Speaker 4: with the investor and the field pressure, but other board
Speaker 4: member may not share this, So SHEO want to use
Speaker 4: the voice of shareholder to push his default in the board.
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Speaker 1: you've been in Japan.
Speaker 6: For over a decade.
Speaker 1: When you first got to Japan, what was the corporate
Speaker 1: culture and how much has it changed from now?
Speaker 5: You know, I think the commentary that I used to
Speaker 5: hear is yeah, there certainly is change, but it's just
Speaker 5: happening so slow in Japan that that's been the frustration
Speaker 5: of a lot of Western industors. I think that that
Speaker 5: narrative has changed in the last few years. It's not
Speaker 5: a question of if, it's a question of how it's changing.
Speaker 5: I mean, if you look at the number of local activists,
Speaker 5: it was just a handful about maybe four or five
Speaker 5: about a decade or twelve years ago. Now antadotally we're
Speaker 5: hearing sort of like fifty sixty.
Speaker 7: That's a big increase in terms of number of asset managers.
Speaker 5: As shoe A just mentioned, the amount sheer amount of
Speaker 5: inbounds that he's getting, you know, instead of him knocking
Speaker 5: on the doors of these Japanese corporates. It's pretty stunning.
Speaker 5: I mean, I think the bigger issue is not so
Speaker 5: much these inbounds. You know, guys like Chouei, they have
Speaker 5: this unique interaction with the corporates. I think what's really
Speaker 5: important is how Shue is allocating his time. Because he
Speaker 5: has such a great relationship, he has to monetize that
Speaker 5: in terms of ROI and.
Speaker 7: How much time I spend with his company.
Speaker 5: You know, at the end of the day, we are
Speaker 5: investors here, right and we're not just crusaders, and that's
Speaker 5: probably the big change with a lot of these engagement managers.
Speaker 1: And James Hono, you used to work on Wall Street
Speaker 1: for many years, used to work at a hedge fund
Speaker 1: in New York City before you moved to Japan. How
Speaker 1: would you describe a Japan's local activist industry?
Speaker 3: Like?
Speaker 1: Are we still in the early stages? So we may be,
Speaker 1: is it mature?
Speaker 6: Give us some examples.
Speaker 5: I think if you use a really blunt metric like,
Speaker 5: for instance, number of external board directors, right, and use
Speaker 5: a US baseball analogy of how many external board directors
Speaker 5: you have in Japan compared to the rest of the world,
Speaker 5: I mean you could say sort of Japan's in the
Speaker 5: maybe fourth inna Europe and maybe other places.
Speaker 7: In Hong Kong elsewhere, maybe it's sort of in the
Speaker 7: fifth or.
Speaker 5: Sixth inning and the US with you know here number
Speaker 5: of external board directors. I mean, there's other metrics, but
Speaker 5: that indicates that there's a lot more to go. Another
Speaker 5: metric is if you look at valuations priced the book
Speaker 5: versus roe, we're still well behind that, you know, in
Speaker 5: Europe and the US, and so we're definitely the earlier
Speaker 5: stages there. I think the final thing that I'll say though,
Speaker 5: is if you look, however, at what the activists will do,
Speaker 5: and most international activists will focus on capital Mana has
Speaker 5: the balance sheet and the academic research that Misaki had
Speaker 5: done that sort of played out. You're starting to see
Speaker 5: a lot of crowded traits where activists are kind of
Speaker 5: running into each other in their portfolio. You don't see
Speaker 5: that with Misaki. I think Tsaki's view is there's a
Speaker 5: bigger story going on here. I think the story that
Speaker 5: people think about is, well, this is sort of played
Speaker 5: out and am I too late? And I think the
Speaker 5: bigger story is the area that Misaki is focused on.
Speaker 5: This is a much much bigger part of the market,
Speaker 5: and they're not seeing any sort of budding heads with
Speaker 5: other managers in that space. You know, a lot of
Speaker 5: people don't realize this, but there are more small midcaps
Speaker 5: listed in Japan than even in the US. There's just
Speaker 5: such a huge part of the market. People don't realize.
Speaker 1: That, and it's quite well known that a lot of
Speaker 1: the MidCap space in Japan is really under research.
Speaker 6: They don't have broke re coverage. Is that correct?
Speaker 4: Yeah, that's correct. Yeah, eight hundred listed is stuck in Japan.
Speaker 4: Five hundred or six hundred names are covered by analysis.
Speaker 1: Okay, so if you roll up your sleeves and do
Speaker 1: some fundamental analysis, you can find a lot of opportunities.
Speaker 2: You're saying, Yeah, I think so.
Speaker 4: And the most of the company are undervalued because of
Speaker 4: they are now coverage by analysis. So yeah, they're a
Speaker 4: huge upside for ir impillment as well.
Speaker 1: That's quite interesting because in the last couple of years,
Speaker 1: the NICKET two to five, you know, before the recent correction,
Speaker 1: has been one of the best performing indices around the world.
Speaker 1: It receives a lot of foreign investment. So you're basically
Speaker 1: saying the story is that a lot of foreigns were
Speaker 1: just looking at that large cap space and not in
Speaker 1: the mid caps.
Speaker 2: Yeah, but I think this is huguely due to the
Speaker 2: week am.
Speaker 4: So we can contribute the profits of a large cab
Speaker 4: company because they have a huge exporter to the foreign businesses.
Speaker 1: Okay, and the James look, I see you as a
Speaker 1: bridge between the local activists as well as like a
Speaker 1: lot of global investors. What if far investors often get
Speaker 1: wrong about Japan.
Speaker 5: I think that what they used to get right. Is
Speaker 5: the culture of equity, the structural changes it was is
Speaker 5: coming at such incremental stages that they always saw this
Speaker 5: as a trading market.
Speaker 7: There's no structural multi year opportunity.
Speaker 3: I think that's changed.
Speaker 5: I think to your earlier question about the blue chip
Speaker 5: names that are focused by most international investors, that's done
Speaker 5: very well because of this now change in mindset. And
Speaker 5: I think that with the crash in the currency in Japan, yeah,
Speaker 5: it's been the large corporates that have really benefited. So
Speaker 5: all together, blue chips have done really well in Japan.
Speaker 5: I think while that's important, again, it's actually the small
Speaker 5: medium size segment that's a much bigger part of the market.
Speaker 5: And if you look at the last few Michaels when
Speaker 5: we had a bear market, I think this is something
Speaker 5: that a lot of people get wrong, is when you
Speaker 5: have a bear market, most small midcaps in Asia, they
Speaker 5: just get slaughtered, you know, irrespective it's just a beta trade.
Speaker 5: Japan is different. You can see some amazing share price
Speaker 5: dispersion with small midcaps in Japan in a bear market,
Speaker 5: which you don't see in Asia ex Japan, and I
Speaker 5: think it's a little bit like GMO in the Boston,
Speaker 5: they were making the comment that small mid caps sort
Speaker 5: of island of value in a crazy insane valuations. I
Speaker 5: think it's an interesting area that they're definitely getting that wrong.
Speaker 6: In Suwae, did you want to add more to them?
Speaker 3: Oh?
Speaker 2: Yeah.
Speaker 4: In that country than Japan, it is assumed that the
Speaker 4: bothom that effort, the CEO has a physiciality to the
Speaker 4: chef order. On the other hand, in Japanese company, it
Speaker 4: is common that someone who have grown within the company,
Speaker 4: often selected as CEO and CEO tell us them more
Speaker 4: care about the carriage and the employee shareholder, and they
Speaker 4: may not necessarily feel the fetish idity toward the shareholder.
Speaker 4: So it is the timing for activists to change the
Speaker 4: company management through the hot fire approach.
Speaker 2: Yeah, I did. This is a most different aspect in
Speaker 2: Japanese market.
Speaker 6: Okay.
Speaker 1: And at the beginning of our discussion, James, you mentioned
Speaker 1: that a major feature of Japan's push for shareholder activism
Speaker 1: has been the corporate governance Code has been the government
Speaker 1: led policies. Can you basically summarize what the corporate governance
Speaker 1: code is for? You know, some of the listeners who
Speaker 1: are not experts on Japan.
Speaker 5: If I were to oversimplify, Essentially, it's uh, sticks and
Speaker 5: carrots for minority shareholders in these listed companies because Japan
Speaker 5: is treating this Japan discount, the price of the book
Speaker 5: is so much cheaper. You know, one big reason is
Speaker 5: because minority shareholders their interests.
Speaker 3: Are not aligned.
Speaker 5: And I think that whether you have policy changes that
Speaker 5: encourage us, let's say, greater dividends or greater focus on
Speaker 5: roe or sticks that kind of give these activist managers
Speaker 5: more sticks or other minority shareholders to raise their voice
Speaker 5: for change. Certainly a lot of these sticks, for instance,
Speaker 5: you could not really use a lot of these sticks
Speaker 5: in the early stages of this evolution, and I think
Speaker 5: that's why the activists they actually did not do very
Speaker 5: well in the first half. But that's changed quite a bit,
Speaker 5: and now the narrative is sort of what part of
Speaker 5: the market small MidCap engagement versus activism. But you know,
Speaker 5: it's essentially it addresses this Japan discount. And as we
Speaker 5: you and I John, we are both in Asia during
Speaker 5: the ancient financial crisis. Essentially the problem of any financial
Speaker 5: crisis is the inefficient allocation of credit, right, you know,
Speaker 5: loans or money going into low Roe or ro I
Speaker 5: c type businesses and that's what kept Japan down. Then
Speaker 5: hopefully this is what's going to create some improvements.
Speaker 1: And sure, I have to ask Japan it is changing,
Speaker 1: but what's the pace is it? Are we seeing a
Speaker 1: big revolution or do you think this is more of a
Speaker 1: slow evolution in terms of corporate culture, corporates acting in
Speaker 1: the best interest of shareholders, female board representation, just describe
Speaker 1: the pace of change.
Speaker 2: I think this is very slow movements.
Speaker 4: And I think the more the corporate executive open to
Speaker 4: the data with sharp order, but still the most of
Speaker 4: the company I know, I think the management don't want
Speaker 4: the data with the activists indeed.
Speaker 1: Okay, so Japan's changing, but it's still at a more
Speaker 1: of an evolution than a revolution.
Speaker 4: Yeah, and that this is for Japanese activists market, so
Speaker 4: their future potential for improving their management and enhancing their
Speaker 4: corporate value.
Speaker 1: And James, look, some other Asian countries are looking at
Speaker 1: Japan's corporate governance code. They've seen the success of how
Speaker 1: it's brought in a lot of global investors and they're
Speaker 1: trying to replicate it. Now I'm talking about Korea and
Speaker 1: also China.
Speaker 6: What's your take. Do you think these.
Speaker 1: Countries can replicate Japan's success?
Speaker 5: I mean absolutely, and I think that the starting point
Speaker 5: obviously is the low price to book valuations and the
Speaker 5: low ROS related to that. But I think there are
Speaker 5: two key elements here. I think one is the most important.
Speaker 5: As I mentioned before, the changes have been driven by
Speaker 5: the government in Japan policy, you know, the stewardship and
Speaker 5: corporate governance codes. I'm aware of the copying.
Speaker 7: And pasting by the FSA.
Speaker 5: Odes here and you know, bringing that over to Korea,
Speaker 5: you know, and they adjusted it accordingly in Korea. But
Speaker 5: there has been that trend from Japan elsewhere, you know,
Speaker 5: places like Korea. But I think there's another element here,
Speaker 5: and that is one kind of common feature of the
Speaker 5: terrible corporate governance is related to inherence tax. Japan and Korea,
Speaker 5: for instance, you know, one of the highest inherence tax
Speaker 5: in the world. I think this in particular is a
Speaker 5: bigger issue in Korea.
Speaker 7: Though, and the reason is that you look at the
Speaker 7: listed companies in Korea, there's a lot more family.
Speaker 5: Owned business there than Japan. And on top of that,
Speaker 5: the inheritance tax rate is even higher in Korea than Japan.
Speaker 5: What that basically means is that this is even a
Speaker 5: bigger issue in Korea. And I think that it's a
Speaker 5: bigger wall for activists to use sticks because if it's
Speaker 5: a family owned businesses, they have a much bigger stake
Speaker 5: in the companies. And so if you're going to fight
Speaker 5: with activists, different kind of fight than in Japan. On
Speaker 5: the other hand, if somebody can kind of solve this
Speaker 5: issue and.
Speaker 3: Work around us.
Speaker 5: And I think one last comment to make is that
Speaker 5: one difference in other places like Korea, though, is even
Speaker 5: if the government did a U turn and said just kidding,
Speaker 5: we're not really serious about this, corporate governance changed. The
Speaker 5: fact is is that a lot of the owners of
Speaker 5: these corporates in Korea, they're actually dying out post Korean
Speaker 5: War with similar histories, and so it's creating this opportunity
Speaker 5: right now. Even if the government did a U turn,
Speaker 5: there will be change.
Speaker 1: And James, before I let you co, you and I
Speaker 1: had a discussion. Now when you move from Wall Street
Speaker 1: to Japan. You mentioned the extremely low number of asset
Speaker 1: managers in Japan. Can you just tell the listener like
Speaker 1: your experience moving over from Wall Street to Tokyo.
Speaker 5: Yeah, I remember I was invited to a conference in Tokyo.
Speaker 5: This was maybe just roughly maybe about seven years ago
Speaker 5: or so. I think it was jiam. It was a
Speaker 5: government body to promote the asset manager and finance industry
Speaker 5: in Japan, and they had invited some big global institution
Speaker 5: on LP investors and to ask questions how do we
Speaker 5: promote the financial industry in Japan?
Speaker 3: And I was kind of stunned.
Speaker 5: I was thinking, like, wow, and these are big global
Speaker 5: institution and LP investors. Why are you going all the
Speaker 5: way to Japan to try to help these guys. I
Speaker 5: wanted to understand what the context, you know, what is
Speaker 5: this event? And they were saying to me that they're
Speaker 5: looking for more allocations to Japan, but they just could
Speaker 5: not find enough japan asset managers. And the numbers ancdotally
Speaker 5: that they had told me was if you take out
Speaker 5: the bally Asthnes the millennium, these sort of like platforms
Speaker 5: that basically take a lot of people single managers or
Speaker 5: ex prop desk people in terms of just standalone ACID
Speaker 5: management firms, in terms of local managers that they can
Speaker 5: interact with on an institutional level. The numbers that they
Speaker 5: told me were something like forty or so in the
Speaker 5: whole country, and you could find that many number of managers,
Speaker 5: maybe find two hundred and three hundred in places like Korea,
Speaker 5: or much bigger number in Hong Kong, Singapore. You could
Speaker 5: find that many number on one street in New York City,
Speaker 5: and that was the case about six seven years ago.
Speaker 5: I think we've seen a huge increase in terms of
Speaker 5: number of managers. But as Shoe mentioned, for example, this
Speaker 5: small MidCap space, there's just so many and they're just
Speaker 5: not enough managers to look at this space. So it's
Speaker 5: a pretty unusual situation in Japan.
Speaker 1: Well, so entrepreneurism is returning back to Japan. It's been
Speaker 1: an intriguing discussion on Japan. It's pushed for corporate governance
Speaker 1: reforms and the rise of local shareholder activism. Thanks for
Speaker 1: joining the shows, Shoeheye and.
Speaker 3: James, Thank you for me, Thank you for having us.
Speaker 1: This podcast was produced by Clara Chan and you've been
Speaker 1: listening to the Asia Centric podcast